I
have never had the pleasure of meeting Ray Dalio, although I have talked with
many people who work with him, and I make it a point to read everything he
writes that I can get my hand on. (His outfit, Bridgewater Associates, is
notoriously guarded about letting their writings out. I know for a fact that
many folks at Bridgewater read my letter – which is admittedly free and
certainly doesn’t come with the gravitas of running $150 billion – but in the
spirit of the Christmas season I wonder if it wouldn’t be appropriate for them
to share a little bit of the wealth.)

That
being said, Dalio did post a piece a couple days ago on LinkedIn that scratches
the political itch that we all seem to have these days. It’s called
“Reflections on the Trump Presidency, One Month after the Election”; and given
the level of connections that Bridgewater management has and their often
outside-the-box views, as well as the fact that this piece from Ray is a
relatively positive one that seems appropriate before Christmas, I offer it up
as this week’s Outside the Box.

Dalio
makes the point “This will not just be a shift in government policy, but also a
shift in how government policy is pursued.” I am just back from a dinner
meeting with a number of people in Washington who have some insight into the
process, and I think I have to agree with that assessment.

The
interesting thing for us observers is going to be how a conservative House with
seriously competing ideas as to how tax policy should be done works together
with a Senate that has different views and with a Trump administration that has
yet again different approaches.

One
thing I focused on here at the dinner was that there seems to be a consensus
building in Congress to almost immediately repeal the Obamacare tax along with
several other taxes and have that as one of the first bills on Trump’s desk.
The reason for that move is that pretty much everyone agrees nothing will
happen quickly, and it isn’t clear which taxes will be cut; but they want to do
something to create stimulus as soon as possible, and then maybe even go back
and change everything all over again next summer. These cuts will be ones that
can be made quickly, and there were more than a few people in the room who are
familiar with the congressional process and who think a final tax bill may not
be out until later in the summer. And if you want some stimulus quickly,
cutting taxes is a simple way to get it. That doesn’t mean the taxes won’t all
get put back on in some form or another later on as they figure out what the
overall tax picture wil l look like; but for now it makes sense to get a quick
tax cut to everyone.

Frankly,
I hope they deal with the corporate tax quickly, as there seems to be some
bipartisan consensus on that. That would be better than trying to cobble
together one huge omnibus tax bill.

The
dinner was hosted by the Committee to Unleash Prosperity. In general, much of the
room was more optimistic about the potential for GDP growth in the coming years
than I am. And they were not as concerned about dealing with the growing total
debt of the US, although they did acknowledge that there is a very large
contingent of deficit hawks in the Congress and Senate who are going to have
their say on the budget and taxes.

Those
competing concerns – lowering taxes and dealing with the deficit and total debt
– leave me distinctly unsure about what will eventually come out of the sausage
factory that will create the new tax laws. But I don’t think there will be a
quick resolution of the issues. It is somewhat ironic that we did my final tax
planning today for 2016, but we really have no idea about planning for 2017
other than to assume that taxes want go down – and we hope that they do! I
would love to be pleasantly surprised by a quick resolution on taxes so that we
could all get on with business.

And
for those of you who simply can’t get enough politics these days (which
sometimes sadly includes even me – though hopefully I will recover soon), let
me suggest a quick read from my friend former Speaker of the House Newt
Gingrich. It’s a collection of his essays on this last election cycle, simply
called Electing Trump. You can get it for $3.99 on
Amazon, and it is available only on Kindle. It really is a quick read – you can
probably knock it out in less than 2 hours.

As
I’ve mentioned before, Newt has graciously engaged me in discussions on a wide
ranged of topics in the past year, and our conversations have of course drifted
to the political. He was consistently telling me since the fourth quarter of
2015 that Trump had a real chance. And he would patiently explain how
frustrated so much of America was. I saw the frustration, but my political
experience didn’t let me see how it would translate into a Trump victory. Now,
hindsight shows that Newt was 100% on target, and he actually kept a sort of
running diary of his comments and interviews, which is how this book could
appear so fast. As Newt often says to me, “Real change requires real change.” Halfway
measures are not going to make anybody happy. That’s where the rubber meets the
road, because what is a good change for some people can be very upsetting to
others. We will just have to see what emerges from the major process of chang e
we’re embarked upon.

Of
course Newt’s book is partisan. As my kids would say, duh. But the political
change he covers is part and parcel of a greater change that is happening.
We’re near the end of Neil Howe’s Fourth Turning. I am reading a book that is
probably going to be the subject of at least two letters early next year. It’s
called Men Without Work.
There are 10 million working-age men in America who are not participating in
the labor force, and that trend line has been moving inexorably from the lower
left to the upper right for 50 years, through Republican and Democratic
administrations, through recessions and boom times. It wasn’t slowed down by
the Clinton/Gingrich welfare reforms. The Greeks and the French have greater
labor force participation rates than we do. And when you couple this worrisome
trend with all of the other societal changes that are developing because of the
increasing use of technology in the business arena, those of us w ho are trying
to project macroeconomic outcomes are going to have to start paying much more
attention to what’s going on sociologically on the ground.

Is
Dalio right? Will we see a lift in animal spirits beyond the Trump rally that
morphs into actual businesses investing money in the creation of jobs? And will
those jobs positively impact Middle America?

The
economic world is no longer simply defined by supply and demand but is
increasingly under the sway of larger social and geopolitical movements. Trying
to get a handle on all this is most confusing for a simple analyst like me.

There
will be no letter from me this weekend, so let me wish you a Merry Christmas
and a Happy New Year and holidays. And I want to thank you for the best gift of
all, the gift of your attention and time. It is precious to me, and I continue
to try to be worthy of it. Now, let’s have a great week and enjoy family and
friends and a little good cheer.

Your
going into planning mode for 2017 analyst,

John Mauldin, Editor
Outside the BoxReflections on the Trump Presidency, One Month
after the Election

By Ray Dalio

Now that we’re a month past the election and most
of the cabinet posts have been filled, it is increasingly obvious that we are
about to experience a profound, president-led ideological shift that will have
a big impact on both the US and the world. This will not just be a shift
in government policy, but also a shift in how government policy is
pursued. Trump is a deal maker who negotiates hard, and doesn’t mind
getting banged around or banging others around. Similarly, the people he
chose are bold and hell-bent on playing hardball to make big changes happen in
economics and in foreign policy (as well as other areas such as education,
environmental policies, etc.). They also have different temperaments and
different views that will have to be resolved.

Regarding economics, if you haven’t read Ayn Rand
lately, I suggest that you do as her books pretty well capture the
mindset. This new administration hates weak, unproductive, socialist
people and policies, and it admires strong, can-do, profit makers. It
wants to, and probably will, shift the environment from one that makes profit
makers villains with limited power to one that makes them heroes with
significant power. The shift from the past administration to this
administration will probably be even more significant than the 1979-82 shift
from the socialists to the capitalists in the UK, US, and Germany when Margaret
Thatcher, Ronald Reagan, and Helmut Kohl came to power. To understand that
ideological shift you also might read Thatcher’s “The Downing Street Years.”
Or, you might reflect on China’s political/economic shift as marked by moving
from “protecting the iron rice bowl” to believing that “it’s glorious to be
rich.”

This particular shift by the Trump administration
could have a much bigger impact on the US economy than one would calculate on
the basis of changes in tax and spending policies alone because it could ignite
animal spirits and attract productive capital. Regarding igniting animal
spirits, if this administration can spark a virtuous cycle in which people can
make money, the move out of cash (that pays them virtually nothing) to risk-on
investments could be huge. Regarding attracting capital, Trump’s policies
can also have a big impact because businessmen and investors move very quickly
away from inhospitable environments to hospitable environments. Remember
how quickly money left and came back to places like Spain and Argentina? A
pro-business US with its rule of law, political stability, property rights
protections, and (soon to be) favorable corporate taxes offers a uniquely
attractive environment for those who make money and/or have money. These
policies will also have shocking negative impacts on certain sectors.

Regarding foreign policy, we should expect the
Trump administration to be comparably aggressive. Notably, even before
assuming the presidency, Trump is questioning the one-China policy which is a
shocking move. Policies pertaining to Iran, Mexico, and most other
countries will probably also be aggressive.

The question is whether this administration will
be a) aggressive and thoughtful or b) aggressive and reckless. The
interactions between Trump, his heavy-weight advisors, and them with each other
will likely determine the answer to this question. For example, on the
foreign policy front, what Trump, Flynn, Tillerson, and Mattis (and others) are
individually and collectively like will probably determine how much the new
administration’s policies will be a) aggressive and thoughtful versus b)
aggressive and reckless. We are pretty sure that it won’t take long to
find out.

In the next section we look at some of the new
appointees via some statistics to characterize what they’re like. Most
notably, many of the people entering the new administration have held serious
responsibilities that required pragmatism and sound judgment, with a notable
skew toward businessmen.

Perspective on the Ideology and Experience of the New Trump
Administration

We can get a rough sense of the experience of the
new Trump administration by adding up the years major appointees have spent in
relevant leadership positions. The table below compares the
executive/government experience of the Trump administration’s top eight
officials* to previous administrations, counting elected positions, government
roles with major administrative responsibilities, or time as C-suite corporate
executives or equivalent at mid-size or large companies. Trump’s
administration stands out for having by far the most business experience and a
bit lower than average government experience (lower compared to recent
presidents, and in line with Carter and Reagan). But the cumulative years
of executive/government experience of his appointees are second-highest. Obviously,
this is a very simple, imprecise measure, and there will be gray zones in
exactly how you classify people, but it is indicative.

Below we show some rough quantitative measures of
the ideological shift to the right we’re likely to see under Trump and the
Republican Congress. First, we look at the economic ideology of the
incoming US Congress. Trump’s views may differ in some important ways from
the Congressional Republicans, but he’ll need Congressional support for many of
his policies and he’s picking many of his nominees from the heart of the
Republican Party. As the chart below shows, the Republican members of
Congress have shifted significantly to the right on economic issues since
Reagan; Democratic congressmen have shifted a bit to the left. The measure
below is one-dimensional and not precise, but it captures the flavor of the
shift. The measure was commissioned by a National Science Foundation grant
and is meant to capture economic views with a focus on government intervention
on the economy. They looked at each congressman’s vo ting record, compared
it to a measure of what an archetypical liberal or conservative congressman
would have done, and rated each member of Congress on a scale of -1 to 1 (with
-1 corresponding to an archetypical liberal and +1 corresponding to an
archetypical conservative).

When we look more specifically at the ideology of
Trump’s cabinet nominees, we see the same shift to the right on economic
issues. Below we compare the ideology of Trump’s cabinet nominees to those
of prior administrations using the same methodology as described above for the
cabinet members who have been in the legislature. By this measure, Trump’s
administration is the most conservative in recent American history, but only
slightly more conservative than the average Republican congressman. Keep
in mind that we are only including members of the new administration who have
voting records (which is a very small group of people so far).

While the Trump administration appears very
right-leaning by the measures above, it’s worth keeping in mind that Trump’s
stated ideology differs from traditional Republicans in a number of ways, most
notably on issues related to free trade and protectionism. In addition, a
number of key members of his team—such as Steven Mnuchin, Rex Tillerson, and
Wilbur Ross—don’t have voting records and may not subscribe to the same brand
of conservatism as many Republican congressmen. There’s a degree of
difference in ideology and a level of uncertainty that these measures don’t
convey.

Comparing the Trump and Reagan Administrations

The above was a very rough quantitative look at
Trump’s administration. To draw out some more nuances, below we zoom in on
Trump’s particular appointees and compare them to those of the Reagan
administration. Trump is still filling in his appointments, so the picture
is still emerging and our observations are based on his key appointments so
far.

Looking closer, a few observations are worth
noting. First, the overall quality of government experience in the Trump
administration looks to be a bit less than Reagan’s, while the Trump team’s
strong business experience stands out (in particular, the amount of business
experience among top cabinet nominees). Even though Reagan’s
administration had somewhat fewer years of government experience, the typical
quality of that experience was somewhat higher, with more people who had served
in senior government positions. Reagan himself had more political
experience than Trump does, having served as the governor of California for
eight years prior to taking office, and he also had people with significant
past government experience in top posts (such as his VP, George HW
Bush). By contrast, Trump’s appointees bring lots of high quality business
leadership experience from roles that required pragmatism and
judgment. Rex Tillerson’s time as head of a global oil company is a good
example of high-level international business experience with clear relevance to
his role as Secretary of State (to some extent reminiscent of Reagan’s second
Secretary of State, George Shultz, who had a mix of past government experience
and international business experience as the president of the construction firm
Bechtel). Steven Mnuchin and Wilbur Ross have serious business credentials
as well, not to mention Trump’s own experience. It’s also of note that
Trump has leaned heavily on appointees with military experience to compensate
for his lack of foreign policy experience (appointing three generals for
Defense, National Security Advisor, and Homeland Security), while Reagan
compensated for his weakness in that area with appointees from both military
and civilian government backgrounds (Bush had been CIA head and UN ambassador,
and Reagan’s first Secretary of State, Alexander Haig, was Supreme Allied
Commander of NATO forces during the Cold War). Also, Trump has seemed less
willing to make appointments from among his opponents than Reagan was (Reagan’s
Chief of Staff had chaired opposing campaigns, and his Vice President had run
against him).

By and large, deal-maker businessmen will be
running the government. Their boldness will almost certainly make the next
four years incredibly interesting and will keep us all on our toes.

IF 2016 was a year of shocks, what will the next 12 months bring? It is time for the annual tradition (dating all the way back to 2015) when this column tries to predict the surprises of the coming year.By definition, a surprise is something the consensus does not expect. A regular survey of global fund managers by Bank of America Merrill Lynch (BAML) points to what most people believe. Following the election of Donald Trump, investors are expecting above-trend economic growth, higher inflation and stronger profits. They have invested heavily in equities and have a much lower-than-normal exposure to bonds.So it is not too difficult to see how the first surprise might play out. Expectations for the effectiveness of Mr Trump’s fiscal policies are extraordinarily high. But it takes time for such policies to be implemented, and they may be diluted by Congress along the way (especially on public spending). Indeed, it may well be that demography and sluggish productivity make it very hard to push economic growth up to the 3-4% hoped for by the new administration.Neither fiscal nor monetary stimulus has done much to lift Japan out of its torpor, after all.American profits, which were falling in early 2016, seem certain to rebound, particularly if the new administration pushes through corporate-tax cuts. But with the market priced on a cyclically adjusted price-earnings ratio of 28.3, according to Robert Shiller of Yale, a lot of good news is priced in. The ratio, which averages profits over the past ten years, is 70% above its long-term average.Meanwhile, the Federal Reserve is pencilling in three rate increases in 2017, something that will probably push the greenback higher (and reduce the dollar value of foreign profits for American multinationals). So the surprise might be that Wall Street will not be that great a performer in 2017.By extension, the second surprise may be that government bonds do not do that badly. The yield on ten-year Treasury bonds is already approaching the top of the 1.5%-3% range in which it has been trading in recent years. Private-sector borrowing costs, including corporate bonds and fixed-rate mortgages, tend to move in line with Treasury yields. Increased borrowing costs would have an adverse effect on economic activity. As a result, sharp rises in bond yields are often self-correcting, since weaker economic data tend to drive yields back down.The third potential surprise of the year might be a dog that doesn’t bark. The biggest worry of the fund managers polled by BAML is that of EU disintegration. As a result they have a lower-than-normal holding in European shares. But the EU might get through the year unscathed if Marine Le Pen is defeated in France’s presidential vote and Angela Merkel is re-elected in Germany. Populism does not win every time, as the recent Austrian presidential poll demonstrated. Indeed, the euro-zone economies could grow at a respectable 1.6% next year, the OECD forecasts. The continent might even seem a safe haven, given events elsewhere.Another potential surprise in 2017 could come from a big market disruption. There have been a few of these events in the past—from flash crashes to sudden leaps in bond yields. They seem to be the result of computer programs that trigger sales when specific price points are reached and a retreat by banks from trading, which has made markets less liquid. The trillions that flow through financial markets every day are also a tempting target for cyberwarfare and cybercrime. The big story of 2017 could be an inexplicable (if temporary) crash in a vulnerable market, such as high-yielding corporate bonds.The final surprise may be served up by that most enigmatic of metals—gold. Working out a target price for gold is a mug’s game. You can understand why investors bought gold when central banks started expanding their balance-sheets after 2008. But it is harder to explain why the price more than doubled in less than three years before falling back since 2011.As investors’ inflation expectations have risen since the American elections, gold might have been expected to rally. Instead, it has fallen sharply—perhaps because investors see the metal as an inferior alternative to the surging dollar. But gold is not just a hedge against inflation, it is also sought out in periods of political risk. And with the Trump administration apparently poised to pursue a more aggressive approach towards China and Iran, it is hard to believe that gold won’t find a few moments to shine in 2017.

Fear and rage must not be used as an excuse to destroy America’s core institutions

by: Martin Wolf

Are the political upheavals of 2016 — Brexit and America’s election of Donald Trump — a triumph of democracy or a threat to it? Democracies must respond to legitimate grievances. Indeed, their ability to do so peacefully is among their strengths. But the demagogue’s exploitation of such grievances threatens democracy. This has happened elsewhere. It would be foolish to assume western democracies are immune.

In 2016, fear and anger became dominant political emotions in the UK and the US — two of the most important, stable and enduring democracies. The fear was over downward mobility and cultural changes; the anger was against immigrants and indifferent elites. They came together in resurgent nationalism and xenophobia. Some Brexiters and Republicans believe in the ideal of absolutely free markets. But that idea did not bring Brexit to the UK or Mr Trump to Washington. The emotions were far more visceral and less attractive. For democrats, the outburst of such primal emotions is disturbing because they are so hard to contain. Democracy is at bottom a civilised form of civil war. It is a struggle for power contained by understandings and institutions.

The understandings are that winners never take all. Opposition is legitimate, opinion free and power curbed. The values of the citizenry are a democracy’s most important asset. They must understand in their bones that it is illegitimate to make temporary power permanent by rigging elections, suppressing contrary opinions or harassing the opposition. There exists no such thing as “the people”; this is an imaginary entity. There are merely citizens whose choices not only may, but surely will, change. While a way must be found to aggregate those views, it will always be defective. Ultimately, democracy, or a democratic republic, provides a way for people with different views and even cultures to live side by side in reasonable harmony. Yet institutions matter, too, because they set the rules of the game. Institutions may also fail. The US electoral college has failed doubly. Its selection of Mr Trump neither accords with the votes cast in the election nor reflects judgment of the candidate’s merits, as desired by Alexander Hamilton. This founding father argued that the college would both guard against “the desire in foreign powers to gain an improper ascendant in our councils” and ensure “the office of President will never fall to the lot of any man who is not in an eminent degree endowed with the requisite qualifications”. The charges of Russian hacking and Mr Trump’s evident defects of experience, judgment and character show that the college has not proved the bulwark Mr Hamilton hoped for. It is up to other institutions — notably, Congress, courts and media — and the citizens at large now to do so.The more powerful the passions and the more uncontained the ambitions, the more likely the democratic system will collapse into despotism. Demagogues are the Achilles heel of democracy. There is even is a standard demagogic playbook. Demagogues, whether of left or right, present themselves as representatives of the common people against elites and unworthy outsiders; make a visceral connection with followers as charismatic leaders; manipulate that connection for their own advancement, frequently by lying egregiously; and threaten established rules of conduct and constraining institutions as enemies of the popular will that they embody. Mr Trump is almost a textbook demagogue. Nigel Farage, former leader of the UK Independence party, has not advanced so far because it has proved harder to capture the UK’s party-based institutions than it is the US presidency.Yet there are similarities between the demagogic elements of the Brexit campaign and the rise of Mr Trump. For both, opponents are enemies rather than fellow citizens who think differently. Both claim to represent the people against foreigners and traitors.

The demagogue’s campaign leads naturally to despotism — the tyranny of the majority that is a mask on the tyranny of one. As institutions are brought under dictatorial control, the opposition is driven into rebellion or acquiescence. Despots use the former as an excuse for repression and the latter to demand absolute obedience. A host of examples of the demagogic route to power exists, in both past and present. Benito Mussolini and Adolf Hitler are case studies of demagogues turned into despots. It is not hard to think of recent examples, from Hugo Chávez to Viktor Orban and Vladimir Putin.Might this be the path some of the most important western democracies are now on — above all the US, standard bearer of democracy in the 20th century? The answer is yes. It could happen even there. The core institutions of democracy do not protect themselves. They are protected by people who understand and cherish the values they embody. Politics must respond to the fear and rage that brought Mr Trump to power. But it must not surrender to them. They must not be an excuse to destroy the republic.

The presidency, particularly if supported by Congress and the Supreme Court, as might happen, is powerful enough to do much damage at home. Virtually on his own, the president may also start devastating wars. A rightwing demagogue in charge of the world’s most influential repository of democratic values is a devastating fact. The question still to be answered is whether the world we have known will survive it.

ATHENS – Since the summer of 2015, Greece has (mostly) dropped out of the news, but not because its economic condition has stabilized. A prison is not newsworthy as long as the inmates suffer quietly. It is only when they stage a rebellion, and the authorities crack down, that the satellite trucks appear.

The last rebellion occurred in the first half of 2015, when Greek voters rejected piling new loans upon mountains of already-unsustainable debt, a move that would extend Greece’s bankruptcy into the future by pretending to have overcome it. And it was at this point that the European Union and the International Monetary Fund – with their “extend and pretend” approach in jeopardy – crushed the “Greek Spring” and forced yet another unpayable loan on a bankrupted country. So it was only a matter of time before the problem resurfaced.

In the interim, the focus in Europe has shifted to Brexit, xenophobic right-wing populism in Austria and Germany, and Italy’s constitutional referendum, which brought down Matteo Renzi’s government. Soon, attention will shift again, this time to France’s crumbling political center. But, lest we forget, the inane management of Europe’s debt crisis began in Greece. A minor country in the grand scheme of things in Europe became a test case for a strategy that could be likened to rolling a snowball uphill. The resulting avalanches have been undermining the EU’s legitimacy ever since.

The problem with Greece is that everyone is lying. The European Commission and the European Central Bank are lying when they claim that the Greek “program” can work as long as Greece’s government does as it is told. Germany is lying when it insists that Greece can recover without substantial debt relief through more austerity and structural reforms. The current Syriza government is lying when it insists that it has never consented to impossible fiscal targets. And, last but not least, the IMF is lying when its functionaries pretend that they are not responsible for imposing those targets on Greece.

When so many lies – with so much political capital invested in their perpetuation – coalesce, disentangling them requires a swift coup, akin to Alexander cutting the Gordian knot. But who will wield the sword?

Tragically, the problem is both obvious and extremely simple to solve. The Greek state became insolvent a year or so after the eruption of the 2008 global financial crisis. Against all logic, the European establishment, including successive Greek governments, and the IMF extended the largest loan in history to Greece on conditions that guaranteed a reduction in national income unseen since the Great Depression. To mask the absurdity of that decision, new loans – conditioned on more income-sapping austerity – were added.

When one finds oneself in a hole, the simplest solution is to stop digging. Instead, Europe’s powers-that-be, the Greek government, and the IMF blame one another for driving Greece’s people into an abyss.

Recently, Poul Thomsen, the director of the IMF’s European Department, and Maurice Obstfeld, its chief economist, protested in a jointly authored blog post, that “it is not the IMF that is demanding more austerity.” The blame lay elsewhere. “[I]f Greece agrees with its European partners on ambitious fiscal targets,” they argued, “don’t criticize the IMF for being the ones insisting on austerity when we ask to see the measures required to make such targets credible.”

Thomsen and Obstfeld are partly right. Greek Prime Minister Alexis Tsipras had no business agreeing to the crushing fiscal targets demanded by Germany and the EU when I was the finance minister. My successor’s claims that the government never accepted the targets are disingenuous. As he well knows, I resigned chiefly because in April 2015 Tsipras agreed to them behind my back. My former colleagues are shooting the messenger, the IMF in this case, for relaying the bad news that the targets they agreed to require even more austerity.

It is also true that the IMF consistently, and correctly, criticized the targets. But what Thomsen neglects to mention is that, without his and IMF Managing Director Christine Lagarde’s personal connivance, the European Commission would not have been able to impose those targets. And I should know: I represented Greece in the meetings of the Eurogroup (comprising the eurozone countries’ finance ministers) where it happened.

Thomsen seems to be aware of his responsibility to stop legitimizing the German-led asphyxiation of Greece’s economy. In a telephone conversation in March with Delia Velculescu, the IMF’s Greek mission chief, Thomsen explained what should happen if Germany insisted on crushing Greece by not granting debt relief. According to the transcript of the call (released by WikiLeaks), Thomsen thought European leaders would leave the issue until after the United Kingdom’s Brexit referendum.

According to Thomsen: “[W]e at that time say, ‘Look, you Mrs. Merkel you face a question, you have to think about what is more costly: to go ahead without the IMF, would the Bundestag say ‘The IMF is not on board?’ Or to pick the debt relief that we think that Greece needs in order to keep us on board?” Right? That is really the issue.”

Velculescu responded that, “for the sake of the Greeks and everyone else, I would like it to happen sooner rather than later.” But it did not happen, because Thomsen and Lagarde never dared to put Merkel on the spot. Instead, the IMF continues to blame others while providing Germany with political cover to maintain its chokehold on Greece.

But, as Velculescu astutely pointed out, the repercussions affect “everyone else.” The troubling developments in Italy, France, and even Germany are a direct consequence of the Greek debacle. But Greece is the immediate victim, and it is therefore the Greek government’s responsibility to cut the Gordian knot, by declaring a unilateral moratorium on all repayments until substantial debt restructuring and reasonable fiscal targets are agreed.

Greece’s voters twice gave their leaders a mandate to do just that: once when they elected the Syriza government in January 2015, and again that July in a referendum. For the sake of Greece – and of Europe – the authorities need to call a spade a spade.

The Battle of Hamburger Hill, later made into a movie directed by John Irvin, refers to the epic, but completely unnecessary, Vietnam War engagement between the US (and South Vietnamese) and North, aligned with China (a proxy war), that saw huge casualties suffered on both sides of the equation. It was a bloodbath. The boys were ground into hamburger. All for Wall Street greed. All so unnecessary. (i.e. if JFK was allowed to live.)Of course some may view such things as completely necessary, because we humans are competitive creatures. What's more, it's not as if we have progressed in any way over the last half-century. In fact, it could be argued we've regressed. But it's all so much more civilized these days - no? We don't have wars anymore - we have guised crises, interventions, and peacekeeping missions that must be supported in the name of democracy - all the while America (and friends) still exercise colonial rule.This is because the real wars are not fought on the battlefields anymore, however they are still with us, just not as obvious. Today, the economy of war is being waged in trade agreements and in the courts, which was the whole idea behind The Transatlantic Trade Investment Partnership (TTIP) and Trans-Pacific Partnership (TPP), both designed for corporate America (and friends) to exercise continued colonial power over its subjects, just not on a conventional battle field on which a strategic advantage was held, but in the courts.Because in the end it's all about money and power - and who hold's it. So as your adversaries become more sophisticated - so must empire (the corporate superstructure) if its' rule is to continue. For corporations, such deals don't matter whether you are from the West or East. It doesn't matter because it's the taxpayers (state) on the hook for whatever the corporations want. So if a company is 'wronged' by a colonial victim because they no longer wish to be exploited, no problem, just sue the country. This is why Canada is the most litigated country in the World, because of NAFTA - because their politicians are idiots. Canadian citizens are being turned into Hamburger (taxed to death) in an undeclared war their politicians do nothing to protect them from because they don't run the country - multinational corporations do.So with TTIP and TPP about to be shot down by Donald Trump, corporate America is naturally working on a new deal they are hoping to sneak in (in order to maintain the West's neo-fascist corporatist system), however things might not go so smoothly here as well if the Presidents recent comments are for real. (i.e. as well as taken literally around the world.) While we wait for this to unfold, we'll have to be happy watching scumbag politicians in Washington attempt to ram through as much leftist (authoritarian) legislation as possible before Trump is sworn in it appears, with the 'fake news' construct at the top of the list at present. I sure hope Trump follows through with his promise to drain the swamp in Washington (the government), or at least get the crazies under control.Because if he doesn't, The United States of America won't make it to the next election without some kind of a civil war / secessions. Apparently the embedded parasites in Washington didn't get that memo at election time. They just don't get it. The people of America are tired of their bullshit. No Chinese style totalitarianism will be tolerated.On to the markets now, as warned, you likely don't want to be shorting stocks until the last day of the year, and then only for a trade because higher highs are likely coming afterwards. And now we have another factor supporting this thesis. Last Thursday, a Dow Theory Confirmation Signal was triggered with the Trani's going to new highs. The criminals that run the markets in New York have been allowing the CBOE Volatility Index (VIX) to rise with stocks so that they can smash the stupids buying calls (on the VIX) going into options expiry next week after the Fed pulls the trigger on Wednesday. This is how they intend to keep stocks up next week. And they will probably do it with Dow 20,000 excitement building.What's more, price managers have the wind at their collective back going into year-end because there's definitely no tax loss selling to worry about. There could be a pullback next week anyway around Fed day (Wednesday), but make no mistake, it shouldn't last. This feels just like the tech mania in 2000, right down to the timing. If that's true, the first week of January should be when the volatility picks up. And this makes sense from the perspective Trump's tax cuts, which should be a high priority item for him next year, would be retroactive, so anybody selling in the New Year would pay half the tax on capital gains compared to this year. So those who want to sell will wait until January - that's for sure.Do you understand why stocks are melting up now? You got the naive buying fundamentals. And then you have the tax planners who aren't selling - hoping for a Santa Claus Rally. That's the formula right now.So Dow 20k - here we come.What's more, if the S&P 500 (SPX) is able to close over 2280 on the cash market, a 'buy signal' will be triggered, where although it may not come immediately, a move to 2450 becomes in play.It's Trumponomics in case you didn't know. Trumponomics today - Hamburger Hill tomorrow. Of course if you're short, it's Hamburger Hill today, because you will get chewed to bits as process unfolds. As discussed previously, the thing about Trumponomics is it's predominantly non-regenerative spending, where sure enough between the massive spending planned (but harder to do) and the tax cuts, it's not surprising to see investors excited. However again, unless The Donald can bring back all those manufacturing jobs from China the benefits will be fleeting, so there's no telling how long it will take for all the excitement to fade just yet. The thing to remember in this regard is inflation will likely ramp up in response to all the stimulus (which is happening), which will keep pressure on bonds, and then stocks once the fairy dust wears off this rally. (See Figure 1)Figure 1

Technical Note: As indicated above, expect to see the risk adjusted SPX to ratchet higher as month (year-end) end approaches, where it would not be surprising to see this all important ratio close at higher fan line trajectories. What's more, this process could continue well into next year before a final blow-off top is put in place for reasons discussed both above and below.In the meantime however, the trick with the VIX is working fine, with both stocks and it moving higher at the same time, keeping the risk adjusted SPX contained at lower trajectories as the blow-off continues. And this is what should be happening right now if the bureaucracy's price managers are to keep the rally alive into year-end. This process should turn short sellers into hamburger by year-end with stocks grinding higher right into January once the volumes dry up as the few sellers out there go on holidays. Volatility at the beginning of January due to tax deferral / planning considerations (see above) should recharge this dynamic however, bringing back all sorts of sellers, including short sellers that will fuel the next rally. (See Figure 2)

Figure 2

Technical Note: As you can see above, tech stocks still likely have more gains ahead. Again, as pointed out above, it wouldn't be surprising to see the NASDAQ hut the first Fibonacci resonance target by Christmas, and the second in March. Such an outcome could coincide with the cessation of the Trump effect honeymoon, which is possible from the perspective events are accelerating on a daily basis. This might not be the final top for stocks with hyperinflation still coming, however it's not unreasonable to think a major correction will be experienced starting some time next year - sooner (March?) or later (August?).In looking above, one can see tech stocks have essentially been disenfranchised for the present mania, however at some point this should change. (i.e. when inflation expectations see a temporary reversal.) Again, if the year 2000 analog is maintained, we should expect to see tech blowing off into March. After that we can start looking at 87 and '28 / '29 analogs to see if this rally is 'the big one'. Thing is, the longer it lasts, the higher the degree on the Elliott Wave Principle scale, where a repeat of the '28 / '29 analog would raise the possibility of a 'Grand Supercycle Degree' top. (i.e. not likely because hyperinflation is still coming.) Obviously it's too early to say right now, however make no mistake, important things in the markets are happening right now. Not the least of which is gold's (precious metals) continued decline.) (See Figure 3)

Figure 3

Technical Note: The Dow / XAU Ratio, pictured above, broke above the monthly 'swing line' on Friday, where if this breakout is not proved 'false' quickly, could lead to more profound selling across the precious metals sector. With speculators buying every dip in the precious metals sector right now, evidenced in falling open interest put / call ratios with prices, unfortunately this could in fact become a reality as harebrained hedge fund managers chase performance / window dressing considerations into year-end. More on this below.The way the traders are getting chewed up right now. Stock market bears are getting chewed up because there are no sellers. And many would be bulls are not participating because it's nuts. (i.e. and they have memories.) Precious metals players are getting chewed up because they are bullish. If they'd just stop buying the derivatives and buy the shares and metals things might start going different, but they are not that smart. (i.e. the hedge funds.) The precious metal markets are severely broken because the participants literally don't know what they are doing anymore. This is why they are getting ground up into hamburger. They keep playing the derivatives, only to get chewed up every time. And it's not over yet. It won't be over until they give up and the machines no longer have these fools to screw over.

I'm not picking on hedge fund managers for no reason; because it's not the little guys doing this - it's you. The little guys are done - broke - putting what little they have left into their houses and attempting to pay off credit cards. Going up the ranks, these guys are being thinned out increasingly as well, in a process that will continue until each successive group gets used up. And that's where the billionaire fund class comes in. These guys won't stop what they are doing until it's too late, because top down funds must be right all the time (which is why they don't), because it's a fashion show - not money management. So they need liquidity whenever the wind changes in order to give the appearance they know what they are doing at reporting time. They don't make money, but they sure are pretty. As unbelievable as this sounds - it's true.So bottom line, because of this paper market 'clusterf*ck' that controls precious metal prices, what will happen in the end is many producers will go bust as commodity prices are kept at or below cost set against debt induced bankruptcies, which is of course the big reason gold (and silver) producers keep putting out ore under such adverse conditions - because they must pay the bankers. As this process works through however, what will happen is increasingly supply will become tighter, especially for silver, which is not hoarded like gold. This is important to realize as very little silver production is actually turned into bullion savings, maybe 15%. So again, eventually, perhaps sooner rather than later, 'peak silver (gold) production', for whatever reasons (declining base metal production byproduct, etc.), should become an issue that supercedes present paper market pricing controls. (i.e. Comex and LMBA.)Until then however, we do have present realities to contend with, where although open interest (OI) on Comex gold and silver are now declining, speculators are attempting to hand tough, especially in silver. Why is this the case? Because it's the especially stupid and greedy funds that play the silver market (because of it's far greater potential - it's very low in relation to gold), where they just can't believe how much money they have lost, and are going to hang until it recovers. Only thing is, the market will continue to go against them longer than they will be able to remain solvent - we hope - which with any luck will at some point put these dumb bastards out of business. This is when silver (and gold) will go up - when these greedy bastards are no longer participating - hopefully following their true vocations as shoe salesmen or ditch diggers.

In the meantime however, and unfortunately for them, precious metals could keep plunging as hedge fund managers are forced to play the window dressing game going into year end - buying stocks and selling precious metals - because you won't want to look like an idiot at year end right? This might affect one's ability to attract more dumb money next year. Remember - it's a fashion show for intellectual idiots that inhabit the financial circles these days. Nonetheless, with the 'Trump Effect' so strong (think strong dollar[$]), and the hedge fund industry being what it is, an orgy of gluttony (think Seven Deadly Sins), that will eventually collapse due the rampant corruption finally catching up to these characters.So, in spite of the likelihood of the Fed raising rates this week, and topping indicators for stocks (see here, here, and here), don't be fooled. As discussed above, once we move into next week, with options expiry and diminishing volumes paramount in terms of influences (with the Fed meeting over), stocks should ratchet higher and precious metals lower as hedge funds continue posturing for the year-end fashion show.Despite this, next year is sizing up to be quite the battle however, a year ending in '7', with big changes likely that will discussed in further commentaries - fundamentally changing many lives.For now however, best to focus on enjoying the holidays, because the markets are a simple and controlled one-way street (for now).

Italy is on the verge of a massive banking crisis.You’ve probably heard that Italian banks are in serious trouble. They’re sitting on more than €360 billion worth of non-performing loans (NPL). These are loans where the borrower has stopped paying.According to Bloomberg, the NPL ratio for five of Italy’s biggest banks is more than double that of the average European bank.

• Italian bank stocks have also nosedived this year…

UniCredit, Italy’s biggest bank, is down more than 45%. Banco Popolare, another major Italian bank, is down 74%. Banca Monte dei Paschi di Siena, Italy’s third biggest bank (and the oldest surviving bank in the world), has plunged 87%.This is a serious red flag. After all, we’re talking about the cornerstones of Italy’s banking system. And, right now, these stocks are trading like a banking crisis is around the corner.In fact, that crisis may have just begun…

• On Monday, Italy’s government said it’s going to bail out its troubled banks…

A "bailout" is when a government injects money into its banking system to keep it from collapsing. If the term sounds familiar, it’s because the U.S. government bailed out several “too big to fail” banks during the 2008 financial crisis.The Financial Times shared the details of the bailout yesterday:The Italian government has asked parliament to authorise up to €20bn to prop up the country’s most fragile banks, as it prepares to mount a possible state rescue of Monte dei Paschi di Siena, its third-largest lender, by the end of the week.

• Monte dei Paschi is Italy’s most troubled bank…

About 35% of its loans are non-performing. It has about five times as many bad loans as the average European bank.This morning, the bank warned that it could run out of cash within four months. Previously, representatives of the bank said it had enough cash to last 11 months.Monte dei Paschi is running out of time. And a bailout looks like the only thing that can keep it from failing. There’s just one problem…

• A bailout won’t actually fix Italy’s broken banking system…

At best, it will buy Italy time. Bloomberg wrote this morning:Italian banks need at least 52 billion euros ($54 billion) to clean up their balance sheets, much more than the rescue package proposed Monday by the government...The Italian government asked parliament this week to increase the public borrowing limit by as much as 20 billion euros to potentially backstop Monte Paschi and other lenders. The rescue package needs to be closer to 30 billion euros to solve Italy’s bad-debt crisis, according to Paola Sabbione, a Milan-based analyst at Deutsche Bank AG. That conclusion assumes UniCredit and some other lenders can raise about 20 billion euros through capital markets, asset sales and profit retention -- leaving the government to fill the rest of the 52-billion-euro hole.In other words, Bloomberg is saying the current bailout plan isn’t nearly big enough. But we don’t think a bigger bailout would make much of a difference.

Nick, who’s been following the situation in Italy for months, wrote me an email yesterday with the details:Italy will go into more than $20 billion in debt to prop up its banking system. That is not going to plug the hole of $400 billion and growing of bad loans. It will just kick the can down the road… and not for long. Soon they will need another bailout. Banca Monte dei Paschi has been bailed out twice already to no avail.It’s not just Italy’s banking system that investors need to be worried about, either…

• Italy’s government is drowning in debt, too…

Nick explains:Italy is one of the most indebted countries on the planet. It’s more than $2.4 trillion in debt, and its debt-to-GDP ratio is north of 130%. For comparison, the US debt-to-GDP ratio is 104%.What’s more, Nick says Italy’s sky-high debt-to-GDP ratio actually underestimates the severity of the situation:GDP measures a country’s economic output, but that’s highly misleading. Mainstream economists count government spending as a positive when calculating GDP. But we all know governments don’t create wealth. They only steal and destroy it.He says a more honest measure of GDP would exclude government spending from economic output.If you did this, the world would see that Italy’s government is dead broke. Nick continues:Government spending makes up more than 50% of Italy’s GDP. If you counted this as negative, Italy’s government would appear hopelessly insolvent.I don’t see how it’s possible for the Italian government to extract enough in taxes from the productive part of the economy—which has been stagnant for over 15 years—to ever pay back what it’s borrowed.

• Investors have yet to “price in” how bad things really are in Italy…

Nick goes on:Italian government bonds are trading near record-low yields. More than $1 trillion worth of Italian bonds actually have negative yields. If you owned one of these bonds, you would actually have to pay to lend Italy’s government money. That’s not how the bond market is supposed to work.Given the huge risks associated with Italy’s bankrupt government, the yields on Italian government bonds should be trading near record highs, not record lows.It’s a bizarre and perverse situation.Nick says it’s only a matter of time before reality sets in in Italy:It’s inevitable that the Italian government bond bubble will burst and soon. But the European Central Bank can put off the day of reckoning temporarily buy buying billions of dollars' worth of Italian debt.

• Nick has encouraged his readers to short Italian government bonds…

Shorting is when you bet against an asset. If the asset loses value, you make money.According to Nick, this is a “no-brainer” trade:Italian government bonds are, without a doubt, in super-bubble territory. It won’t be long before a pin pricks it and… pop.You, too, can flip Italy’s debt crisis into profits by signing up for Crisis Investing today. We’ll even give you a full 120 days to decide if the service is right for you. Click here to get started.

Chart of the Day

The euro just hit a 13-year low.Today’s chart shows the exchange rate between the euro and the U.S. dollar. When this ratio is rising, it means the euro is strengthening against the dollar. When it's falling, it means the euro is weakening against the dollar.You can see the euro started plunging against the U.S. dollar in early 2014. It then traded sideways for over a year before it started falling again.Today, one euro “buys” $1.04 USD. The euro hasn’t been this weak since 2003. But Nick thinks the euro is headed even lower from here. He explained why earlier this month in the International Man Communiqué:If it breaks below its March 2015 low of $1.046, it would pave the way for it to test parity with the US dollar (which hasn't happened since late 2002). If that happens, look out below.In other words, the euro just broke below a critical support level. This tells us that it will likely keep falling. That’s bad news for everyday Europeans. But it’s great news for Nick’s readers…You see, Nick recommended shorting the euro in the August issue of Crisis Investing. In just four months, his readers are already up 18%. But they could see much bigger gains if the euro keeps falling like Nick expects.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.